Tag: Schooling

Drawing down a RESP – How, how much and when it’s available

It’s December as this is being written, not traditionally when we talk about back-to-school matters.  

For parents whose child launched a full-time post-secondary career this past September however, there is an important threshold reached around this time.  The upper limit on some Registered Education Savings Plan payments are eased once the beneficiary/student has completed 13 consecutive weeks in a qualifying educational program – which would be roundabout the beginning of December.  

Before getting into the details of this threshold, let’s provide some context by looking at how funds are drawn from a RESP.

Accessing RESP money

The extraction of funds from a RESP is covered by a network of qualifying rules, which in turn can affect the continued use of the plan.  A payment out of a RESP will generally fall under one of these categories:

Educational Assistance Payment (EAP)

An EAP is defined in the Income Tax Act as an amount, other than a refund of payments (most often a “refund of contributions” described below), paid out of a RESP to or for beneficiaries to assist them to further their education at the post-secondary level.  Each payment comprises accumulated income and government grant/assistance money, and is taxable as regular income to the student in the year received.

The Canada Revenue Agency considers an EAP to be a broad term, but does not provide specific guidance on what that may encompass.  Instead, CRA’s general approach is that if payments are made in accordance with a particular registered plan, the respective RESP trustee will comply with the ITA requirements.

A full-time student may become entitled to an EAP once enrolled in and attending a qualifying educational program.  

Refund of contributions 

Plan subscribers (parents most often) are entitled to the return of their own after-tax contributions, which accordingly are not taxed upon receipt.  Depending on the plan terms, this could be payable to plan subscribers personally or to the student.  If the student is not qualified for an EAP at the time, part of the refund will have to be paid back to the government proportionate to the amount of grant/assistance the plan received.

Accumulated Income Payment (AIP) 

In limited circumstances where it is clear that it will not be possible for the RESP to pay any EAPs, the income earned within the plan may be paid out as an AIP.  This type of payment is made to the plan subscriber and is subject to regular income tax plus an additional tax of 20%.  

Payment to a designated educational institution 

In situations where neither an EAP nor an AIP can be made, the plan income must be paid to a Canadian educational institution which would otherwise qualify for EAP purposes.  This is basically a forfeiture of the income as the subscriber does not receive a tax slip or a donation receipt.

EAP annual limits and the 13-week threshold

There are limits on the early access to most RESPs.  For full-time students, the EAP limit is $5,000 during the first 13 consecutive weeks in a qualifying educational program.  If tuition and related payments are higher, on a case-by-case basis the government may approve a higher EAP amount.  

After that 13-week threshold has been crossed, there is technically no limit on the amount of EAPs that can be paid, so long as the student continues to be qualified.  Of course that doesn’t mean that the floodgates are open; any EAP request will still have to satisfy the requirement of being for a bona fides cost of financing post-secondary education. 

Administratively, CRA relies upon RESP trustees to process the bulk of submitted expenses.  Since 2008, its administrative approach is to allow the payment of up $20,000 (to be indexed annually by the Consumer Price Index) without the RESP trustee having to assess the reasonableness of specific items, nor to require the production of receipts or a list of expenses.  Above that figure, a list of expenses would be necessary as part of the RESP trustee’s diligence or review to assess the reasonableness of the amount.  Also bear in mind that CRA may later inquire into those expenses, so receipts should be retained as proof should the need arise. 

Finally, be aware that $5,000/13-week rule will apply once more if the student has been away from school for a period of 52 weeks or more. 

Steady/Study as she goes – Supporting education savings

In August the federal government released the Canada Education Savings Program (CESP) 2009 Review.  

This is the umbrella under which is housed the familiar Canada Education Savings Grant (CESG), and the apparently not-so-familiar Canada Learning Bond (CLB).  (More on the CLB below.)

Overall, past performance metrics for the CESP seem quite positive, and the trajectory for the future appears similarly on neutral to favourable ground.

RESP – Contributions and asset growth

While annual RESP contributions increased in 2009 to just over $3.1B, that is less than a 1% increase over 2008.  At the same time, the number of RESP beneficiaries increased at a slower rate in 2009 (about 6.8%), than the average for the preceding 3 years (9.2%).  Not surprisingly then, annual contributions per beneficiary dropped (by 1.5%) last year for the first time since 2001, falling to an average of $1,423.  

When the CESP was introduced in 1998, Canadians held $4B in RESP assets.  By the end of 2009, those assets had grown to $25.9B, and apart from the 2008 downturn when there was a 3% decline, RESP assets have increased every year since CESP inception.  

Of course a 3% drop is a mere blip in comparison to the way general investment and retirement portfolios may have fared in 2008.  Consider though that the asset tally includes existing assets from the prior year plus contributions and CESP supplements.  Respectively, those additions in 2008 were $3.1B and $599M.  If one carves out these additions, existing assets declined by about 19% that year.

And though one might expect fairly conservative approaches to RESP investment, I am reminded of a friend who stuck it out with the markets through the downturn.  With one child having started university in 2009, and another commencing this September, he is now lamenting not having glided to conservatism in these lead-up years.  He may work a bit longer to pay the education tab now, but presumably their success will be the payback.

CESG – Dollars and participation rates up

Total CESG payments have increased every year since CESP inception, up 2% from 2008 to 2009 at $612M.  Over its history, the CESG has contributed almost $5.1B toward education savings.

The average age of new beneficiaries has decreased every year since CESP inception in 1998 when the average child was almost 8 years old.  For 2009, average age is 3.6 years, which the Review suggests is evidence that the program has encouraged families to begin saving early for post-secondary education. 

It is estimated that over 40% of children up to age 17 participated in the CESG in 2009, with peak participation occurring in the 5-9 age range at over 45%.  There is no explanation or suggestion for this phenomenon, though greater promotion in recent years may explain higher participation of younger children.  As to the very young, as a parent who is just getting the last of 3 out of diapers, I think I know where some of the money (and distraction) goes early on. 

CLB – Money left on the table

While much of the report is rosy, one troubling aspect is the low participation rate for the Canada Learning Bond.  Acknowledging that participation rates have increased by about 5% annually from 2005 inception up to 2009, a rate of 19.3% is unfortunately low.

To summarize the CLB, it is aimed at children from low-income families, using entitlement to the National Child Benefit Supplement (NCBS) as the qualification criterion.  It pays an initial $500 directly to a child’s RESP, and another $100 for each year of continuing eligibility to age 15 – and does not require matching parent contributions. 

So, if qualification is independently determined, and the parent need not be out-of-pocket … why don’t we see 100% participation?  I can’t answer that, but I do have a suggestion.

This is not a mere statistical estimate of qualification: The NCBS, as part of the Canada Child Tax Benefit (CCTB) program, is monitored using parents and children’s social insurance numbers.  This is tracked and shared with those parents on CRA’s “My Account” secure web-server.

So here is the suggestion: 

Maybe the government could credit the CLB amounts to the appropriate My Account location for children of NCBS entitled families.  Credits would earn no income, but could be wired to a financial institution once an RESP is actually opened.  If no RESP is ever opened, then the credit could be triggered in future if and when the child claims a tuition credit or provides similar evidence of qualifying post-secondary education.  

It may not be quite that simple, but I don’t think it’s much more complicated.